Ivanhoe signs new oil deal with Ecuador Capped at $37.00.barrel

Ivanhoe signs new oil deal with Ecuador

Wednesday, October 08, 2008
QUITO — — Ecuador on Wednesday signed a service deal with Canada's Ivanhoe Energy Inc. to exploit an oil field, marking a victory for the leftist government in its drive to boost control over the crucial sector.


Ivanhoe plans to invest up to $5-billion (U.S.) over 30 years to extract oil from the Pungarayacu field in Ecuador's Amazon jungle. Ecuadorean oil officials have said the company could produce up to 120,000 barrels a day within five years.

Payments to Ivanhoe: To recover its investments, costs and expenses, and to provide for a profit, Ivanhoe Energy Ecuador will receive from Petroproduccion a payment of US$37.00 per barrel of oil produced and delivered to Petroproduccion. The payment will be indexed (adjusted) quarterly for inflation, starting from the contract date, using the weighted average of a basket of three US Government-published producer price indices relating to steel products, refinery products and upstream oil and gas equipment. Type: The contract is a Specific Services Contract under which Ivanhoe Energy Ecuador will use its unique and patented HTL technology, as well as provide advanced oil-field technology, expertise and capital to develop, produce and upgrade heavy crude oil from Block 20, which contains the Pungarayacu field. In addition, Ivanhoe Energy Ecuador has the right to conduct exploration for light oil in the contract area and to use any light oil that it discovers to blend with the heavy oil for delivery to Petroproduccion.

Term: The 30-year term may be extended by mutual agreement for two additional five-year periods. The contract has three phases. The first two phases are for evaluation of the field's production capability and the crude-oil characteristics, as well as for the construction of the first HTL plant. The third phase is for full field development and will include drilling additional exploration and development wells. Additional HTL capacity will be added as necessary for expected production. HTL is a field-located upgrading process that converts heavy oil to a transportable, upgraded liquid product. The upgrading process generates by-products that can be used on site to create steam for injection into the reservoir, thereby improving recovery, or alternatively, to generate electricity. The processed oil can be transported by pipeline without the need to add diluent and the upgraded product has a significantly higher market value than raw heavy crude.

The HTL process can be used in technically and economically scalable plants - down to as low as 10,000-30,000 barrels per day - in modular form near producing wells. For the Pungarayacu oil field and the balance of Block 20, all of these advantages are expected to come into play.

HTL's environmental advantages ------------------------------
Numerous significant environmental benefits result from using the integrated HTL process for heavy-oil production, compared with the use of conventional production methods. These include a) minimizing surface disturbance by the relatively small scale of the HTL plants; and b) significantly reducing greenhouse gases, on a full life-cycle basis, through the generation of onsite energy from the by-products of HTL processing. : Italics Ours.

President Rafael Correa, a leftist former economy minister, has pushed foreign oil companies already producing to switch to new service deals that would allow the state to keep all the oil they extract in exchange for a fee.

"Today, we have signed a contract that marks the change of times in our country," said Mr. Correa after signing the deal and replacing the country's oil chief to speed up negotiations with other companies.

"We want private companies to have a fair return, but they also have to respect the winnings of the country."

The service deal with Ivanhoe is a win for Mr. Correa's drive to increase the OPEC nation's sway over the sector, but also highlights the U.S.-trained economist's willingness to continue working with foreign oil companies to boost production.

Mr. Correa has so far refrained from oil nationalizations, but threatened to expel foreign oil companies that fail to raise production levels. Most companies have halved investment since new contract negotiations started last year.

Mr. Correa's allies in Venezuela and Bolivia have nationalized key swaths of their economies including oil and gas.

Local oil experts have charged the new deal with Ivanhoe lacks transparency and questioned the company's capacity to meet production targets with experimental technology to upgrade the quality of heavy crude on site.

Ivanhoe has operations in Canada and China, and its working on a technological innovation that potentially makes developing heavy oil fields more economical for smaller producers.
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